Employment Strength Is the Real Deal

Jason Stipp: I'm Jason Stipp for Morningstar. We got the government's labor report for month of January on Friday, and it showed robust job growth of 243,000 jobs added to the economy. This was much more than most economists were expecting.

I'm checking in today with Vishnu Lekraj--he is an equity analyst covering the employment sector--and Bob Johnson, our director of economic analysis, to get their take on the report.

Thanks for joining me guys.

Vishnu Lekraj: Thank you.

Bob Johnson: Great to be here.

Stipp: So this definitely what you are expecting; it beat what a lot of people were expecting. What was in your mind behind that upside surprise, Bob?

Johnson: Well, I think there were a number of things. I think the auto industry did surprisingly well and drove a lot of the manufacturing sector, and manufacturing's durable goods jobs were our big in the month. That was the number one thing.

I think also construction, maybe some of its because of the good weather we've had, but construction is a on a roll and has had a plus-20,000 number two months in a row now, not just one month, but a couple. So, that was certainly a positive, and I think that helped drive a lot of the numbers up.

Stipp: Vishnu, as you looked across the sectors, was it broad-based? Bob mentioned manufacturing and autos. Were there other areas of strength and also areas of weakness?

Lekraj: No, to me that's the biggest positive. It was broad-based across most categories. The only categories that were slightly down or flat were the finance categories and the government category, and the information services category, which is the media and entertainment industry. So those three were the negatives, but everything else was broad-based. It was tens of thousands of job growth in each category, which is highly positive in my opinion.

Stipp: One other things that surprised me was retail actually showed some strength and it's not something you would have expected. What's your take on that?

Lekraj: Well, retail usually in January lets go of some of their temporary workers from the holiday season. This time around, there was some of that, some of the smaller specialty retail teen shops did do that, but department stores started to hire. And that's something that I'll probably have to take a little deeper dive into, talk with our retail team about, because that's an interesting development, and it's something to keep your eye on.

Johnson: And certainly another thing there in the numbers, we thought retail was going to be a big downer, and that was probably one of the surprising items in the report--the fact that it wasn't. Certainly, again, the same theme with autos. We are making more autos, we are selling more autos. So the dealerships cranked up their employment hiring. So, some of the employment in the auto showrooms offset some of the things that you saw in the teen retailers that Vishnu referenced.

Stipp: And I'm picking up a bit of a theme here about confidence. So, if we are seeing more people going out and buying cars, for example, it shows that there is a certain amount of confidence. And I think this number also could be important psychologically for just how people are thinking about the employment market.

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Lekraj: Definitely. Broad-based employment growth. In addition to that, nonfarm payrolls grew, but the employment rate fell also, and fell significantly, 20 basis points, which in combination, all these things, really do build a lot of confidence in the economy.

And again, it's a domino effect, where there's confidence here, there's going to be confidence there, confidence there, and hopefully you build upon that.

Stipp: That virtuous cycle. So I want to dig into the unemployment rate in a moment. Before we get there, Bob, when you look broadly at how many jobs we've created now over the recovery, we got a little more insight on that this time around, right?

Johnson: Yes. They did go through and rebenchmarked some of the old numbers. And now, we look at the numbers, and we've recovered almost 3.7 million of the jobs that we lost during the recession. ... We lost about 8.8 million jobs. And again, this is a private-sector number. So, we've recovered about 41% of our jobs. So, a combination of a good number this month plus a 200,000 to 300,000 revision to the past numbers, additively, when you look at it, it brought us up from about 33% of jobs recovered to about 41% of the jobs that we've lost being recovered. As we get near that 50% mark, I think people will start to feel a little better.

Stipp: Certainly. Vishnu, this isn't the only report you look at when you're calculating what's going on in the employment market. Are you seeing confirmation of some of these trends elsewhere?

Lekraj: When I look at the reports from the employment services firms and what they are reporting as far as revenue and profitability in combination with other economic reports, and not just from the government, but from other data sources, when you triangulate everything, it's a positive trend within the economy, which is, again, a highly positive thing to look at.

... There are going to be some naysayers; there are going to be some negative things said today about the report being as robust as it is. But when you look at private-sector reports, when you talk to the companies, when you see what they are doing and producing, it is real.

Stipp: Bob, question of the day. Can we sustain this? Or what might throw us off the rails?

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Johnson: This is a really nice number. I don't know that the 243,000 jobs that we saw today is going to be sustainable forever. As you know, I like to look at the percentage change year-over-year on a three-month moving average, and it takes out some of the wild months--but even that number looks better. We look close to 2% in terms of employment growth, and that was up from 1% a year ago at this time, but it's only up from 1.75%, say, three or four months ago.

So, a nice trend. I like where we are at, but I wouldn't look for the 240,000-250,000 forever. I mean, certainly the weather's been wonderful, and it has helped out a couple of industries. Autos is certainly hitting on all cylinders and is bound to kind of slow a bit here at some point.

Stipp: Vishnu, we talked month after month after month about the job growth was there, but not as much as we would like to see. Are we getting closer this month to the kind of trend that we would normally expect?

Lekraj: Definitely, and that's really what's heartened me today is that 240,000-250,000 private sector growth is in line with past recoveries, and this is without help from government and without help from construction really, which are the two main categories that [typically] drive a lot of job gains over an economic recovery. And if you add those in, if you normalize those categories, you add them in here, [we'd probably be close] to 300,000-350,000 [job gains], which is towards the higher end of an economic recovery. And when you look at what this number is doing without any of those, and again you speak to some private businesses, it's a very, very positive sign.

Stipp: Bob, are you worried about Europe throwing everything off the rails here?

Johnson: No, not at all. You know my theme, I wrote about it a few months ago, is that Europe wasn't going to throw us off the rails, but we were going to pull them out of their recession.

And based on seeing a few better PMI numbers (their purchasing managers' surveys) out of Europe this week, and a couple of little, better pieces of news out of Europe, I think it indeed may look like the U.S. is pulling them out of their recession now, not vice versa.

Lekraj: Now, I just want to--I agree with Bob 100% on that account, and there is some positive news coming out of Europe, but it's not over yet.

Johnson: You're right.

You still have Italy to deal with. You still have France that's been downgraded. You have Spain, Portugal. You have Greece that's still, you know, a second round of bailouts and it's still not fixed yet.

So, there are still lot of things that can go wrong in that area, but fortunately for us in the world economy today, the U.S. and emerging markets are stronger than what Europe is in terms of driving growth. So, that's a positive.

Stipp: We talked about how important confidence is. So, I would just add to that, if we see things really start to fall apart in Europe, that confidence can also--even though it's not a fundamental reason for a slowdown--it can certainly cause things to tap the brakes at least. So, we will definitely keep an eye on that situation.

I wanted to come back to the unemployment rate. We did mention that it came down. You said in the preview jobs report that there were going to be some change as to how this data was calculated. What effect did that have, could you see on the number of [8.3]%?

Johnson: Once a year they go through, and they add back all the population that was added in one year. Instead of doing it month-by-month, they do it once a year, and then they give you a one-time adjustment factor and then leave it at that, so the numbers really aren't comparable from year-to-year.

And so what they did is they gave us a one-time true-up, and they told us what that was. On that basis, we added about the same number of jobs based on asking everybody if they have a job or not, versus asking businesses how many jobs they added, and those two are roughly in line--good news.

So the participation rates are also something that's driven off of that household survey and the unemployment rate. And again, those numbers all look like nothing fishy happened at all.

Stipp: Vishnu, did you see any potential problem areas in the unemployment rate number?

Lekraj: Not necessarily. There was employment growth, more people found jobs, fewer people were unemployed. But there are some people who fell off the rolls again. Bob did mention that the participation rate did hold pretty steady, but again the folks that dropped out of the workforce did grow.

Now, there could be a couple of factors behind that. It could be that they couldn't find any jobs, which is understandable, but there may be some folks that were in the employment market who have gone back out, who really don't need to be in there 100%.

Stipp: So, potentially, like a household, somebody has a job and they are worried about it, so the spouse gets a part-time job. When things start to look a little bit better, the spouse says, I don't need that part-time job anymore, so they technically come out of the "looking for a job" group.

Lekraj: Exactly.

Stipp: So, Bob, last question. You mentioned earlier that you were going to look at the hourly earnings. How did that come out and what are we seeing there?

Johnson: The hourly earnings number was up 0.2%, so that's good news. And again, knowing that some of it was manufacturing jobs and somewhat of a mix issue ... autoworkers get paid a higher rate ... that brought the overall rate of wage growth up, and that's really good because that drives personal income up.

So I think we will have a revision in some of the personal income numbers for late last year because employment numbers are higher and wages are higher. So I think that's really good news because the more money that people have in their pockets, the more they can spend and keep this virtuous cycle rolling, and I think there's some evidence of it. Even on the manufacturing side, I think hours worked was up three-tenths of an hour, which is a very, very big jump for one month. So those people are going to have to go back and hire more workers because the workers they already have are working too hard. So, I think there is even more good news ahead in manufacturing.

Stipp: All right, guys, a lot of good news to report today. Your insights are great, as always. Thanks for joining me.

This article is for informational purposes only. This article is not intended to provide tax, legal, insurance or other investment advice. Unless otherwise specified, you are solely responsible for determining whether any investment, security or other product or service is appropriate for you based ...

This article is for informational purposes only. This article is not intended to provide tax, legal, insurance or other investment advice. Unless otherwise specified, you are solely responsible for determining whether any investment, security or other product or service is appropriate for you based ...

This article is for informational purposes only. This article is not intended to provide tax, legal, insurance or other investment advice. Unless otherwise specified, you are solely responsible for determining whether any investment, security or other product or service is appropriate for you based ...